Bank Run Vulnerability

Bank run vulnerability is the risk that all users of a protocol attempt to withdraw their funds simultaneously. This can exhaust the available liquidity and lead to a total collapse of the platform.

In decentralized finance, this is a major threat to any protocol that promises instant liquidity. If the protocol cannot fulfill all requests, it may have to freeze withdrawals or liquidate assets at a loss.

This creates a panic that can spread to other platforms. Understanding this vulnerability is essential for designing robust liquidity management systems.

It is a classic financial problem that is magnified by the speed and accessibility of crypto markets.